Why the Cannabis Industry Needs an SRO

Government agencies typically play the lead role in establishing rules and regulations designed to ensure businesses operate responsibly and in a manner that prevents public harm. But many industries also take it upon themselves to complement and enhance that responsibility by establishing self-regulatory organizations or SROs, resulting in benefits to both businesses and the public at large.

What is an SRO?

An SRO is a private membership organization that sets policies and standards for fair, ethical and safe practices for a particular industry. SROs enforce those standards to promote their members’ success and the public good. SROs are not government agencies; however, they work to address government concerns and in that way can actually reduce regulations on their members.

Examples of well-known SROs include the Financial Industry Regulatory Authority (FINRA) for securities brokers and traders, the International Accounting Standards Board and the National Association of Realtors, but in fact there are dozens of lesser known SROs throughout the business world.

In a speech at Columbia University earlier this year, Robert W. Cook, president and CEO of FINRA, discussed the benefits SROs provide to their members. These include:

Access to expertise – SROs are typically led by people with deep experience in their industries and knowledge about regulatory issues. The organizations offer a variety of educational forums that help members improve their businesses, adopt best practices, and learn about regulatory issues.

Higher standards of conduct – SROs and their members develop and enforce standards that dis-incentivize unethical and opaque practices that can undermine investor and public confidence. This in turn gives regulators greater confidence in the integrity of an SROs’ members.

Influence on the direction of an industry – SROs are membership-driven organizations. They also incorporate public input. But member’ perspective is crucial and helps shape effective standards that address real issues facing their businesses and the industry as a whole.

Is an SRO right for the cannabis industry?

SROs have proved to be a highly effective means of helping industries grow and protecting the public. This is particularly true for industries experiencing significant growth, such as the legal cannabis industry.

Cannabis businesses are constantly innovating as they work to achieve success in a sector in which the rules are evolving. This rapid growth, the involvement of public health issues, plus the fact that cannabis remains illegal at the federal level, has triggered increasing interest from all levels of government. Cannabis businesses can expect this to grow and lead to a web of complex and shifting regulations.

Regulators often look to the success of an industry’s SRO when deciding how the government will regulate that industry. A strong SRO for the cannabis industry could shield members from unnecessary government interference. In addition, strong national standards that address critical issues such as financial record-keeping and transparency, responsible advertising practices, prevention of youth use and drugged driving, and lab testing best practices would elevate the legitimacy of the SRO’s members in the eyes of regulators and business service providers alike. It would make it easier for members to access banking, investment capital and other professional services necessary for businesses to keep growing.

Finally, a cannabis industry SRO that demonstrates a good faith effort to hold its members to rigorous standards of operation could have an opportunity to influence future regulation at the state and, in the event of prohibition ending, federal level. All SROs impact the industries in which they operate. An SRO for cannabis businesses would shape the future of the one of the most exciting and fastest-growing sectors of the U.S. economy – the legal cannabis industry.

About the author:

Andrew Kline is President of the National Association of Cannabis Businesses (NACB), the cannabis industry’s only self-regulatory organization which is working with its members to develop national standards that will help strengthen cannabis-related businesses by reducing regulatory uncertainty and increasing legitimacy.

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